Americans’ greatest fear about retirement is they will outlive their money. Sadly, for many, this fear is likely to become a reality.

Boston College’s Center for Retirement Research warns that a majority of American households do not have adequate retirement savings to support their lifestyles for the rest of their lives. Other troubling statistics include: 

  • 28 percent of non-retired adult Americans have no retirement savings or pension (Federal Reserve Board).
  • 52 percent of households age 55 and older have no retirement savings. Among those with some retirement savings, the median amount is approximately $109,000 — enough to generate only about $405 per month of income for a 65-year-old (U.S. Government Accountability Office (GAO)).
  • Social Security — designed to replace only a portion of workers’ pre-retirement earnings — provides most of the retirement income for about half of households age 65 and older (GAO).

These data prove America is in the midst of a retirement savings adequacy crisis. But how did we get here? There has been a confluence of causes.

Real Wages and the "Dollar Dilemma"

Real (i.e., inflation-adjusted) wages for most Americans have been stagnant or declining for about four decades. They have risen recently, but too slowly to help most of those approaching retirement. As a result, many working Americans face an increasingly pressing “dollar dilemma” each time a paycheck arrives. Where should the money go? Immediate needs, like the mortgage or rent, food, clothes, transportation, health care or supporting an elder relative or an unemployed adult child? College-savings funds for children? A “rainy day” fund in case of a job loss, health crisis, or other emergency? Or should it be set aside in a retirement account? 

For too many Americans, immediate needs, near-term risks, and their children’s futures win out. Saving for retirement must wait for a future pay day.

"For too many Americans, immediate needs, near-term risks, and their children’s futures win out. Saving for retirement must wait for a future pay day."

Americans with employer-provided retirement plans have help managing this dollar dilemma. On their first day at a new job, most employees get a stack of paperwork from their employer’s human resources office. It often includes a retirement plan enrollment form accompanied by an authorization to deduct retirement-account contributions from each paycheck. Once the employee has signed these forms, she rarely thinks about it again. The money flows from paycheck to retirement account without the employee touching the money or making a choice. Dollar dilemma dodged.

The Coverage Crisis

Yet, not everyone has this option. A “coverage” problem exacerbates our adequacy crisis. According to the U.S. Labor Department, only about 70 percent of American employees have access to an employer-provided retirement plan. Only 77 percent of these employees enroll, sometimes due to eligibility barriers. As a result, only 54 percent of all American employees have employer-provided retirement accounts. The other almost-half either have no private retirement account, or they participate in the individual market for retirement products like Individual Retirement Accounts (IRAs), some of which offer reduced tax advantages and leave retirement savers to wrestle with the dollar dilemma. 

And those are the employees. According to a 2016 academic study, about 9 percent of Americans are “independent contractors” who, by definition, do not have employers. Independent contractors — a growing workforce segment — are on their own in the individual retirement plan market. They also face added Social Security risk. Employers pay half of Social Security taxes and withhold the employees’ half, whereas independent contractors must pay both the employer’s share and their own. In addition, since Social Security benefit levels are based on the worker’s earnings and how long she has worked, independent contractors who may miss a tax payment now and again (a more common occurrence than for employees) may get lower Social Security benefits because they will appear to have worked and earned less.

Source: U.S. Department of Labor

Inadequate Savings

Even among enrollees in employer-provided plans, many are not saving enough. Confusion sown by the tax code is partly to blame. In 2018, employees under the age of 50 can invest up to $18,500 in their 401(k) employer-provided retirement plans and that amount will not be taxed by the federal government. Employees older than age 50 are allowed to make additional tax-free “catch-up contributions” of $6,000. Some employees read these tax limits as retirement savings advice from the federal government — that is, they represent the “correct” amounts to put aside for retirement each year because, after all, Congress said so. That’s wrong. Congress set these limits based on tax revenue estimates and policy preferences. Congress is not your financial advisor. 

Financial advisors generally use two rough measures of “adequate” retirement savings. One measure is post-retirement income equaling 70 to 90 percent of pre-retirement income. So, if your family’s annual income before retirement is $90,000, then the goal would be $63,000 to $81,000 of annual retirement income, at least, including your Social Security benefits. Since inflation and health care costs that rise with age will take bites out of that annual retirement figure, income that grows with inflation or time (or just more income, in general), will provide greater security. A second measure is total retirement savings of between eight and 11 times your annual income. With the same pre-retirement family income, your retirement savings should be $720,000 to $990,000, not counting Social Security.

It is possible that $18,500 per year in 401(k) contributions until age 50, and $24,500 per year thereafter, would allow a retirement saver to achieve these goals. However, it may not. The result will depend, in part, upon when you start to save and how you invest your savings.  Regardless, the tax code does not contain a magic retirement savings formula.

The Shift in Retirement Plans

One of the most important contributors to the retirement adequacy crisis is the shift in the types of retirement plans employers offer. Defined-benefit plans provide guaranteed lifetime income in the form of “retirement paychecks,” similar to the paychecks employees receive while they are working. The amount of money in the retirement paycheck is typically determined by the employee’s wages, years of service, and age. Further, the employer sponsors the plan, contributes the money that pays for benefits and plan administration, and hires experts to advise about investment decisions and benefit determinations. 

Defined-contribution plans, typically 401(k) plans, allow employees to save money for retirement tax-free, but offer no guarantee with respect to retirement income. Some employers match employee contributions, but many do not (they are not required to do so). Since employees decide how to invest their savings, they bear the associated risks. Ultimately the amount of money in the employee’s account at retirement is the amount she will have. As noted, that amount is often inadequate.

According to the GAO, private-sector employers offered about 103,300 defined-benefit plans and about 207,700 defined-contribution plans in 1975. By 2015, employers offered 45,600 defined-benefits plans and 648,300 defined-contribution plans. Since the number of participants in plans may vary dramatically, the number of plans is not a perfect measure, but it roughly illustrates the shift. Total assets by plan category also tells the story.  In the private sector in 2015, total assets in defined-contribution plans and IRAs — that is, retirement plans that make individuals responsible for investment decisions and offer no income guarantees — were $12.6 trillion. Defined-benefit plans held only about $2.9 trillion in assets. Simply, guaranteed lifetime retirement income from pensions is now the exception rather than the rule.

"... guaranteed lifetime retirement income from pensions is now the exception rather than the rule."

Americans are Living Longer

With less access to defined-benefit pensions, and inadequate savings, Americans also face the prospect of stretching their retirement money over a longer life span. In the United States, life expectancy at birth has risen from around age 70 in 1968 to just shy of age 79 in 2015. But these aggregate numbers mask the true picture. A man reaching age 65 today can expect to live, on average, until age 84.3; a woman turning age 65 today, on average, will live to age 86.6. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.

This is a good news story for humanity and a tribute to our technological and medical progress, but retirement economics has failed to keep up with longer life spans. Greater average longevity puts pressure on the solvency of our Social Security system. Perhaps more important, while individuals are bearing more retirement-related risks due to the shift from defined-benefit to defined-contribution plans — savings risk, investment risk, longevity risk, morbidity risk, and others — the risk they will outlive their retirement savings is steadily growing along with life expectancy.

A Real Crisis Requires Immediate Solutions

The retirement savings adequacy crisis is real, and it is here. It has not yet garnered the attention it deserves or inspired the solutions it demands. A companion post suggests six starter steps you can take to avoid your own personal retirement crisis. Yet, many aspects of the retirement crisis are structural — the products of public policy choices made over decades. Beyond attending to our personal retirement planning — a necessary first step for our families and our country — we should insist that our public officials and the stakeholder groups that represent us commit themselves to finding answers.

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Investing involves risk, including possible loss of principal.

The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.

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